Page 90 - DLIS405_INFORMATION_STORAGE_AND_RETRIEVAL

Unit 9: Trends in Indexing

Introduction Notes

Key trends in indexing include Islamic indices, frontier markets and alpha-producing indices.
There is growing demand for better representation of Asia, especially the Hong Kong-China-Taiwan
relationship.
Stock exchanges on a global basis are becoming increasingly interested in the index business and
are looking to use indices for derivative purposes.
Any further slicing and dicing of indices is probably redundant for retail investors.

According to Andrew Clark, some of the hot topics in indexing include Islamic
indices, frontier markets (including Africa), and alpha-producing indices.
On the ETF side, he said there appears to be interest in bringing out indices which produce alpha.
From what happened during the financial crisis, the hope is that the risk controls are in place, so
people are willing to take on more risk, he explained.

At the same time, there seems to be a need for a better representation of Asia, said Clark, especially
the Hong Kong-China-Taiwan relationship.
Market participants generally feel that the very few indices out there which represent all three
markets are not very good, he said.
There is also a focus from stock exchanges on using indices for derivative purposes – either from
indices which already exist, or by creating custom ones, said Clark.
Exchanges on a global basis are becoming increasingly interested in the index business, he said.

Working with Stock Exchanges

When it comes to index providers and stock exchanges working together, an exchange might, for
example, have an existing index which it wants to turn into a derivative, explained Clark.
However, if there are 300 securities in the index, the exchange will need to get a good representation
that gives the same basic return but with only one-tenth of the number of securities.

Index providers can reduce such an index to 30 stocks, with the same basic return and fairly good
correlation, said Clark. The exchange can then take that smaller index and turn it into a derivative.

Trends in Global Indexing

New indices and index strategies
– Broader benchmarks
– Narrower benchmarks
– Customized benchmarks
– Benchmarks for alternative asset classes
– “Active” benchmarks

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